Chapter 4 (Jurado, De Leon, Pineda) Extinguishment of Obligations General Provisions Modes of extinguishment of obligations 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) By payment or performance By loss

of the thing due By the condonation or remission of debt By the confusion or merger of the rights of the creditor By compensation By novation Annulment Rescission Fulfillment of a resolutory condition Prescription

Other modes not mentioned in the article 1) 2) 3) 4) 5) 6) Renunciation or waiver by the obligee or creditor Compromise Expiration of the resolutory term or period Death of one of the contracting parties in purely personal obligations The will of on of the contracting parties in certain contracts The agreement of both contracting parties or what is sometimes known as mutual assent or dissent

Section 1- Payment or performance Article 1232 Payment means not only the delivery of money but also the performance, in any other manner, of an obligation Concept Broadest sense o It consists in the fulfillment of the obligation either voluntarily or involuntarily, including its extinguishment by any means or mode whatsoever Limited sense o It consists in the normal and voluntary fulfillment of the obligation by the realization of the purposes for which it was constituted o The civil code adopted this concept Means not only the delivery of money but also the performance, in any other manner, of an obligation In a more limited sense o It consists in the fulfillment of the obligation by the delivery of a sum of money Pineda Payment Payment is the satisfaction or fulfillment of prestation that is due, resulting in the extinguishment of the obligation Kinds of payment

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1) Voluntary 2) Involuntary Requisites of a valid payment 1) 2) 3) 4) 5) De Leon 1) In ordinary parlance, payment refers only to the delivery of money 2) May consist not only in the delivery of money but also the giving ta thing, the doing of an act or not doing of an act Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) Concept and effect of substantial compliance of an obligation There is substantial compliance by the debtor when in good faith, he has attempted to perform the contract or prestation, but through oversigh, or any excusable neglect, he failed to make full and complete performance, for which the other party may be indeminified. The omission or defect must be slight or unimportant, that is, it must not be so material as to frustrate the accomplishment of the intended work. There must be no willfull or intentional deviation from the contract or prestation by the debtor, and the omission or defect must not material, otherwise, the performance will not amount to substantial compliance Right to rescind when proper The right to rescind a contract under art. 1191 cannot be invoked when there has been only slight breaches of the obligation because if the performance is substantial, that is equivalent to fulfillment or payment of the obligation. Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n) When debt considered to paid A debt may refer to an obligation to deliver money, to deliver a thing, to do an act, or not to do an act. 1) Integrity of prestation a. A debt to deliver a thing (including money) or to render service is not understood to have been paid unless the thing or service has been completely delivered or rendered, as the case may be. Partial or irregular performance will not produce the extinguishment of an obligation as a general rule 2) Identity of prestation a. The second requisite means that the very prestation due must be delivered or performed i. When the existence of a debt is admitted by the debtor or established as evidence of the creditor, the burden of proving extinguishment by payment devolves upon the debtor who claims payment The capacity of the person paying Capacity of the person receiving the payment Delivery of the full amount or the full performance of the prestation Propriety of the time, place and manner of payment Acceptance of payment by the creditor

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When is payment understood paid or performed Obligation to give o When the debtor or obligor has completely deliver the thing which he had obligated to himself to deliver Obligation to do o When the obligor has completely rendered the service which he had obligated himself to render Obligation not to do o When the obligor has completely refrained from doing what he had obligated himself not to do Exceptions: 1) When the obligation has been substantially performed in good faith a. The obligor may recover as though there has been a strict and complete fulfillment, less damages suffered by the oblige 2) When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection Recovery allowed in case of substantial performance in good faith First exception to the rule laid down in art. 1223

Requisites for the application of art. 1234 1) There must be substantial performance 2) The obligor must be in good faith Recovery allowed when incomplete or irregular performance is waived. 1) Founded on the principle of estoppel 2) If the payment is incomplete or irregular, the creditor my properly reject it. Requisites for the application of art. 1235 1) The oblige knows that the performance is incomplete or irregular 2) He accepts the performance without expressing any protest or objection Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it. (n) Who may pay? 1) The debtor himself or his legal representative 2) Any third person

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a. b. c.

Whether he has an interest in the obligation or not Whether payment was made with the knowledge and consent of the debtor or not These rules cannot be applied to the case of a 3rd person who pay the redemption price in sales with the right to repurchase i. This is so because the vendor a retro is not a debtor with the meaning of the law

Right of the creditor 1) The creditor is not bound as a general rule to accept the payment or performance by a third person 2) Exceptions: a. When it is made by a third person who has an interest in the fulfillment of the obligation such as a joint debtor, guarantor or surety i. Where payment is made by a joint debtor, in excess of what he should pay for the benefit of his codebtor, such payment cannot be considered as a payment unduly made under art. 2164 of the CC bus as one made by a person interested in the fulfillment of the obligation in accordance with the provisions of art. 1236 of the said code b. When there is stipulation to the contrar. i. The credtitor is deemed to have waived the his right to refuse to deal with strangers to the obligation.

Rights of the third person 1) If a 3rd person pays the obligation with the knowledge and the consent of the debtor, there are two right available to him. a. He can recover from the debtor the entire amount which he has paid b. He is subrogated to all of the right of the creditor 2) If payment is made without the knowledge or against the will of the debtor a. He can recover only insofar as the payment has been beneficial to the said debtor Right of reimbursement 1) The third person who made the payment is entitle to reimbursement a. The extent of the mount of recovery is different b. Whether the payment is effected with the knowledge and consent of the debtor or without his knowledge or even against his will 2) If payment was effected with the knowledge and consent of the debtor a. The third person can recover from the latter the entire amount which he has paid 3) Without the consent or knowledge a. The third person can recover only insofar as the payment has been beneficial to the latter. Right of subrogation 1) Debtor (without the knowledge or against the will of the debtor) a. Third person cannot compel the creditor to subrogate him in his right such as those arising from a mortgage, guaranty or penaly 2) With the knowledge and consent a. Shall be subrogated to all of the right which the creditor could have exercises against the debtor and other third person. Subrogation

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1) Is a right available to 3rd person or payor, whereby he is entitled, not only to demand reimbursement from the debtor but also to exercise all of the rights which the creditor could have exercised against the debtor and against 3rd persons such as those arising from mortgage, guaranty and penalty. 2) Reimbursement on the other hand, is merely a simple personal action available to third person or payor against the debtor to recover from the latter what he has pain insofar as the payment has been beneficial to said debtor. Gratuitous payments 1) If the payment is made by a third person who does not intend to be reimbursed by the debtor the presumption arises that such payment is a donation. a. The debtors consent is necessary 2) If consent is not secured then the rules states in art. 1236 and 1237 will still apply. 3) As far as the creditor who has accepeted the payment is concerned, the debtors consent is immaterial; the payment is valid in any case. Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations." (1160a) Capacity to make payment 1) Necessary that the person who pays the obligation should have the necessary legal capacity to effect such payment a. True to all obligations 2) It is essential for the validity of payment that the payor should have the free disposal of the thing due and the capacity to alienate it. The absence of one of the other will affect the validity of the payment 3) If the payment was effected by a person who does not have the free disposal of the thing due and/or the capacity to alienate it such payment is not valid a. Minor/insane person b. It may be annulled by a proper action in court at the instance of the payor or his legal representative, unless it falls within the purview of the exception expressly provided for in art. 1246 of the code c. If an incapacitated person offers to pay the obligation and the creditor refuses to accept the payment because he is aware of the payors incapacity, the obligation still subsists. i. Such creditor cannot be compelled to accept the payment, as a result, consignation o the thing dues is not possible. Free disposal of a thing due That the thing to be delivered must not be subject to any claim or lien or encumberance

Capacity to alienate That the person is not incapacitated to enter into contracts and for that matter, to make a disposition of the thing due

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) To whom the payment shall be made 1) The person in whose favor the obligation has been constituted 2) His successor in interest 3) Any person authorized to receive it. a. Not only to a person authorized by the creditor but also to a person authorized by law to do so. i. Guardian ii. Executor or administrator of the estate of a deceased person

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iii. Assignees or liquidator of a partnership or corporation Unauthorized persons 1) If the payment is made to a person other those enumerated in the article, payment is not valid. 2) Exceptions: a. Payment made to a third person, provided that it has redounded to the benefit of the creditor b. Payment made to the possessor of the credit provided that it was made in good faith

Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) Payment of incapacitated persons 1) If payment is made to a person who is incapacitated to administer his property the payment is considered valid a. If he has kept the amount or thing paid or delivered b. Insofar as the payment has been beneficial to him i. The payment is beneficial to him when that which has been paid or delivered is applied or spent for some rational, necessary, or useful purpose for his benefit. Rule is only applicable only to obligations to give Payment of third persons 1) If the payment is made to a third person, the rule is that it shall be valid insofar as it has redounded to the benefit of the creditor. Effect of payment to an incapacitated person 1) Payment to a person incapacitated to administer or manage his property is not valid unless such incapacitated person kept the thing paid or delivered or was benefitted by the payment 2) In the absence of this benefit, the debtor may be made to pay again by the creditors guardian or by the incapacitated person himself when he acquired or recovers his capacity a. Proof of such benefit is incumbent upon the debtor who paid When benefit to creditor need not be proved by the debtor 1) Subrogation of the payers in the creditors rights 2) Ratification by the creditor or 3) Estoppel on the part of the creditor. The presumption of benefit is present in the following 1) If after the payment, the 3rd person acquired creditors rights 2) If the creditor ratifies the payment made to the third person 3) If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive the payment

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Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) Payment to possessors of credit 1) Possession of credit and not the possession of the document evidencing it a. Applied to the payment of to the original creditor by a debtor who is not aware of the fact that the credit has already been assigned to another person. b. It may also be applied to the payment made to an assignee, although the assignment is afterwards rescinded or annulled. c. Should have been made in good faith i. If this requisite is present then the payment shall release the debtor. In such case, the remedy of the creditor would be proceed against the possessor of the credit to whom payment was improperly made. Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Payment after judicial order of retention 1) If the debtor pays the creditor after he has been judicially ordered to retain the debt, such payment shall not be valid. a. After the debtor has received the notice of attachment or garnishment, payment cannot longer be made to the creditor whose credit has been attached to satisfy a judgment in favor of another person. Such payment must be made to the proper officer of the court issuing the writ of attachment or garnishment in conformity with the provisions of the rules of court. 2) In an action against the debtor who is the creditor of another, the latter (debtor-stranger), during the pendency of the case may be ordered by the court (or by any competent authority thought it be administrative) to retain the debt until the right of the plaintiff, the creditor in the main litigation is resolved 3) Payment made subsequently by the debtor-stranger shall not be valid if the plaintiff wins the case and cannot collect from the debtor cannot collect from the debtor to whom the payment is made. Such payment is considered as made in bad faith. Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. (1166a) Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) Special form of payment 1) 2) 3) 4) Dation in payment Application of payments Payment by cession Tender of payment and consignation

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) What must be paid:

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1) Obligations to give a. If the obligation is to give and the object is a thing which is specific or determinate, the debtor cannot fulfill his obligation by delivering a thing which is different from that which is due. b. This is so although the thing which is delivered may be of the same value or even more valuable than that which is due 2) Obligations to do and not to do a. If the obligation is to do or not to do and the object is an act or forbearance which is specific and determinate, the obligor cannot fulfill his obligation by substituting another act or forbearance. b. In both cases the creditor or oblige cannot be compelled to accept the delivery of the thing or the substitution of the act or forbearance. i. If he accepts the delivery or substitution, such acceptance shall give to the delivery or substitution the same effect as fulfillment or performance of the obligation.

Effect of dation in payment 1) If the creditor and debtor enter into an agreement by virtue of which a certain property is alienated by the debtor to the creditor as the equivalent of performance of the obligation, the law on sales will govern. 2) Dation in payment a. Defined as the transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. b. Dacion en pago i. There is in reality an objective novation of previous obligation effected by a change of the object thereof ii. Civil code 1. Special form of payment which is most analogous to a contract of sale a. Once there is an agreement between the debtor and the creditor with regard to the thing which must be delivered by the former to the latter as the equivalent of the performance of the obligation the law on sales shall govern, with the credit as the price of the thing. Effect if object is generic 1) Article 1246 is based on equity and justice. 2) If there is no precise declaration in the obligation with regard to the quality and circumstance of the indeterminate thing, which constitutes its object, the creditor cannot demand a thing of the best quality, neither can the debtor deliver a thing of the worst quality 3) The obligation can only be fulfilled by the delivery of a thing which is neither superior quality nor inferior quality. a. Relative appreciation b. If there is a disagreement between the parties, the law steps in and declare whether the obligation has been complied with or not, depending upong the purpose of such obligation and other circumstances. Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a) 1) If debtor changes is domicile in bad faith or after he has incurred delay, the additional expenses shall be borne by him. Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

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However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a) Partial performance of obligation can be refused by the creditor The creditor cannot be compelled to accept partial payments form the debtor, unless there is a an express stipulation to the effect. Character of payment 1) Identity a. Only the prestation agreed upon and no other must be complied with. 2) Completeness a. Refers to the rule that the thing or service in which the obligation consists must be completely delivered and rendered. 3) Indivisibility a. Refers to the rule that the payment or performance must be indivisible. Applies only to an obligation where there is only one debtor and one creditor. It is not applicable to one where there is plurality of debtors and creditors. The latter is governed by different rules. It is not applicaple to one where the different prestations are subject to different terms and conditions. o Even when there is only one debtor and only one creditor, the rule stated in the article is only one in the nature of general rule Three exceptions: o When the obligation expressly stipulate the contrary o When the different prestations which constitute the object of the obligation are subject to different terms and conditions o When the obligation is in part liquidated and in part unliquidated When partial performance is allowed 1) When there is an express stipulation to that effect 2) When th debt is part liquidated and in part unliquidated 3) When the different prestation in which the obligation consists are subject to different terms or conditions which affect some of them. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) 1) Payment shall be made in the currency stipulated a. If not possible, the payment shall be made in legal tender of the Philippines. 2) If there is no stipulation a. Payment shall be made in legal tender of the Philippines Meaning of legal tender Refers to such currency which may be used for the payment of all debts, whether public or private all notes and cois issued by the Central Bank of the Philppines

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Payments with negotiable paper 1) Negotiable papers or mercantile documents such as promissory notes payable to order or bills of exchange are not legal tender 2) It is logical that the delivery of such papers or documents by the debtor to the creditor shall produce the effect of payment. 3) If the debtor tenders a check to the creditor as payment of the obligation, the latter has a perfectly valid right to refuse it., even if the check may good a. In such case, the tender shall not produce the effect of payment. b. Exceptions: i. When the document has been cashed ii. When it had been impaired through the fault of the creditor Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) Requisites 1) There must be a decrease or increase in the purchasing power of the currency which is unusual or beyond the common fluctuation in the value of said currency 2) Such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Art. 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a) Place of payment 1) If the obligation is to deliver a determinate thing, the payment shall be made at the place where the thing might be at the time the obligation was constituted 2) In any other case, the payment shall be made at the domicile of the debtor. This rule is intended to govern unilateral obligations. Reciprocal obligations are governed by special rules. As a corollary, if the debtor changes his domicile in bad faith or after he has incurred in delay, it is logical that additional expenses shall be borne by him. a. Domicle i. Is the place of a persons habitual residence ii. The place where he has his true fixed permanent home and to which place he, whenever he is absent, has the intention to return b. Residence i. Element of domicile ii. Simply required bodily presence as an inhabitant in a given place. 3) If there is a stipulation, the payment shall be made in the place designated. Subection 1- application of payment

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Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a) Concept Application of payment may be defined as the designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor Requisites In order that there will be an application of payment, it is essential that the following requisites must concur 1) There must be only one debtor and one creditor 2) There must be two or more debts of the same kind a. The rules on application of payment cannot apply to a guarantor or surety whose liability is extended or confined only to a particular obligation i. When such guarantor or surety is made to pay in default of or solidarily with the principal debtor, whatever payments may be made cannot be applied to shoes for which he is not responsible either subsidiarily or solidarily. b. It is essential that each of the debt must be of identical or homogenous specie. i. If the debtor has several monetary obligations in favor of one and the same creditor and he pays a certain sum to the latter which is not sufficient to satisfy the aggregate sum of all the obligations, the rules on application of payment can be applied, but where some of the obligations consist in the payment of money and the rest to deliver things other than money, such rules can no longer be applied. 3) All of the debts must be due a. Application of payment is possible only when all of the debts are due b. 2 exceptions i. When there is stipulation to the contrary ii. The application of payment is made by the party whose benefit the term or period has been constituted 1. Article 1196 2. If from the tenor of the obligation which is not yet due or from other circumstances, it should appear that the term or period is for the benefit of the debtor or the creditor and there are other obligations of the said debtor in favor of the same creditor which are already due, the payment made may be applied by the said debtor to the obligation which is not yet due. 4) The amount to be paid by the debtor must not be sufficient to cover the total amount of all the debts a. Right of debtor to make application i. The right to designate the debt to which the payment shall be applied belong to the debtor. 1. The right is available to him only at the time when payment is made 2. If he does not exercise such right, the same is extinguished and the application would then be governed by the provisions of art. 1254, unless the creditor, in the meantime, makes the application by giving to the debtor, who accepts t, a receipt in which application of the payment is made. 3. Exception a. If the debtor does not avail himself of the right to designate the debt to which the payment shall be applied, and subsequently, he accept from the creditor a receipt in

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b.

which an application of payment is made, the former cannot complain the same, unless there is cause for invalidating the contract Application of payment by the debtor is, therefore, the general rule, while application of payment by the creditor is the exception. i. What such creditor merely does is to propose the application by giving to the debtor a receipt in which the application is made subject to the express or tacit approval of the debtor. ii. The debtor may accept or reject the application,

Rules on application of payments 1) The debtor has the first choice; he must indicate at the time of making payment, and not afterwards, which particular debt is being paid a. If, in making use of his right the debtor applied the payment to a debt, he cannot later claim that it should be applied to another debt. 2) The right to make the application once exercised is irrevocable, unless the creditor consents to the change 3) If the debtor does not apply the payment, the creditor may make the designation by specifying in the receipt which debt is being paid 4) If the creditor has not also made the application or if the application is not valid, the debt which is most onerous to the debtor among those due, shall be deemed to have been satisfied 5) If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately Limitations on preferential right of the debtor to choose the debt to be paid 1) The debtor cannot apply the payment to a debt not yet liquidated or due unless a. There is a contrary stipulation b. He is the one given the benefit of the period or term 2) If the creditor is given the benefit of the period or term, which has not yet arrived, an application of payment cannot be made by the debtor 3) If there is a specific agreement as to which debts shall be paid first, the debtor cannot vary the agreement without the consent of the debtor 4) If there is a principal obligation which bears interestse without first paying the principal 5) A debtor cannot choose to pay a bigger debt partially, when the payment made can be applied as full payment to a smaller debt. Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173) Mandatory rule Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a) 1) Only applies when payment cannot be applied in accordance with the rules previously states or if the application cannot be inferred from other circumstances. Meaning of onerous debt An onerous debt is one with a burden

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When debts are not of the same burden 1) The rule is that the debt which is most onerous to the debtor shall be deemed to have been satisfied. 2) Jurisprudence a. Where there are various debts which are due and they were incurred at different dates, the oldest are more onerous to the debtor than the more recent ones b. Where one debt bears interest and the other does not, even if the latter was incurred at an earlier date, the first is more onerous to the debtor. As between two debts which bear interest the debt with the higher rate of interest is more onerous to the debtor. c. When one debt is secured and the other is not, the first is more onerous to the debtor d. Where the debtor is bound as principal in one obligation and as guarantor or surety in another, the former is more onerous to him e. When the debtor is bond as a solidary debtor in one obligation and as a sole debtor in another, the former is more onerous to him. f. Within a solidary obligation, the share which corresponds to a solidary debtor will be most onerous to him g. Where one obligation is for indemnity, the share which corresponds to a solidary debtor would most onerous to him h. When on debt is liquidated and other is not, the former is more onerous to the debtor. When debts are of the same burden If debts which are due are of the same nature and burden, the rule is that the payment shall be applied to all of them pro rate or proportionately. It is evident that this rule can also be applied to a case in which it is fairly impossible to determine which of the debts which are due is the most onerous or burdensome to the debtor by applying any of the rules stated in the first paragraph of the article. Subsection 2- payment by cession Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a) Concept 1) Cession or assignment may be defined as a special form of payment whereby the debtor abandons all of his property for the benefit of his creditors in order that from the proceeds thereof the latter may obtain payment of their credits Requisites 1) 2) 3) Plurality of debts Partial or relative insolvency of debtor Acceptance of the cession by the creditors In case the creditors do not accept the cession or assignment a similar result may be obtained by proceeding in accordance with the insolvency law.

Kinds 1) Contractual a. Art. 1255 2) Judicial a. Insolvency law

Alexandra V. Khadka Obligations and Contracts

Payment or Performance

Distinguished from dation in payment 1) As to number of parties- while dacion en pago there may be only one creditor, in payment by cession plurality of creditors is essential 2) As to the financial condition of parties: while dacion en pago the debtos is not necessarily in a state of financial difficulty, in payment in cession the debtor is in a state of partial or relative insolvency 3) As to object- while is in dacion en pago what is delivered by the debtor is merely a thing to be considered as the equivalent of the performance of the obligation, in payment in cession what is ceded by the debtor is the universality of his property 4) As to effect- while dacion en pago the payment extinguishes the obligation to the extent of the value of the thing delivered either as agreed upon or as may be proved, unless the silence of the parties signifies that they consider the delivery of the thing as equivalent of the performance of the obligation, in payment in cession the effect is merely to release the debtor for the net proceeds of the things ceded or assigned unless there is a contrary intention. Effect 1) It is apparent from the provision of art. 1255, that, in the absence of a contrary stipulation, the assignment or abandonment by the debtor of all his property to the creditors shall only release him from responsibility for the net proceeds of the property assigned. 2) The extinguishment of his obligations will only be partial 3) The assignment does not transfer the ownership of the things or objects to the creditors. What is transmitted to the latter is only the possession of such things or objects including their administration so that they can proceed with the sale and from the proceeds thereof their respective credits are paid. Subsection 3 Tender of Payment Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a) Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178) Concept 1) Tender of payment consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with his obligation. 2) Consignation, on the other hand, refers to the deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law after refusal or inability of the creditor to accept the tender of payment.

Alexandra V. Khadka Obligations and Contracts

Payment or Performance

Distinctions 1) Tender of payment is the antecedent of consignation; in other words, while the first is the preparatory act, the second is the principal act which will produce the effects of payment of the obligation 2) Tender of payment by its very nature extrajudicial in character while consignation is judicial. Special Requisites of Consignation: The debtor must show 1) That there is a debt due 2) That the consignation has been made either because the creditor to whom tender of payment was made refused to accept the payment without just cause, or because any of the causes stated by law for effective consignation without previous tender of payment a. There must have been tender made by the debtor to the creditor b. Requirements i. That the tender of payment must have been made prior to the consignation ii. That is must have been unconditional iii. That the creditor must have been refused to accept the payment without just cause c. Five exceptions to the rule that in order that the consignation shall produce the effects of payment, it is essential that there must be a previous tender of payment i. When the creditor is absent or unknown or does not appear at the place of payment ii. When he is incapacitated to receive the payment at the time it is due iii. When, without just cause, he refuses to give a receipt iv. When two or more persons claim the right to collect v. When the title of the obligation has been lost d. Effect of valid of tender of payment i. When a valid tender of payment is made, the obligation is not extinguished, unless it is completed by consignation ii. However, it has the effect of exempting the debtor from payment or interest and/or damages. iii. The suspension of the running of interest is governed by principles which regard reality rather than technicality, substance rather than form. iv. Good faith of the debtor should in simple justice excuse him from paying interest after the offer was rejected. 3) That previous notice of the consignation had been given to the persons interested in the fulfillment of obligations a. Formal act manifested not only to the creditor, but also to other persons interested in the fulfillment of the obligation directly announcing the consignation which will be made as a result of the unjust refusal of the creditor to accept payment. b. Although separate and distinct from each other, the procedure, as far as the debtor is concerned, can be simplified by combining the two in a single act, which would include principally the tender of payment and subsidiarily the notice of consignation, unless the creditor accepts the payment. i. Even in this case it is necessary that notice shall be made to the other parties interested in the fulfillment of the obligation, such as a surety or guarantor or a solidary co-debtor 4) That the thing or amount due had been placed at the disposal of the judicial authority a. This requisite is complied with if the debtor deposits the thing or amount, which the creditor refused or had been unable to accept, with the clerk of court. b. Normally, this requirement is accompanied by the filling of the complaint itself which is sometime denominated as an action for consignation, but which is in reality an action for specific performance of the obligation or an action for cancellation of the obligation. 5) That after the consignation had been made, the persons interested in the fulfillment of the obligation had been notified thereof. a. After the consignation had been made, the persons interested in the fulfillment of the obligation must be notified thereof.

Alexandra V. Khadka Obligations and Contracts

Payment or Performance

i. This notification is separate and distinct from the notification which is made prior to the consignation. Requisites of a valid consignation(De Leon) 1) 2) 3) 4) 5) Existence of a valid debt which is due Tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it Previous notice of consignation to persons interested in the fulfillment of the obligation Consignation of the thing or sum due Subsequent notice of consignation made to the interested parties

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178) 1) Before the creditor can be charged with the expense of consignation, it is essential that such consignation must have been properly made. 2) Consignation is considered to have been properly made in the following cases a. When the creditor accepts the things or amount deposited as payment of the obligation without contesting the efficacy or validity of the consignation b. When the creditor contests the efficacy or validity of the consignation and the court finally decides that it has been properly made or cancels the obligation at the instance of the debtor in accordance with the provision of the first paragraph of art. 160 Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180) Withdrawal by debtor of thing or sum deposited The debtor may withdraw as a matter of right the things or sum deposited 1) Before the creditor has accepted the consignation 2) Before a judicial declaration that the consignation has been properly made, as he is still the owner of the same. Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a) Effects of Consignation 1) If the creditor accepts the thing or amount deposited without contesting the validity or efficacy of the consignation, it is logical that the obligation is cancelled or extinguished. 2) If the creditor contests the validity or efficacy of the consignation, the result if litigation Effects of improper consignation 1) The obligation stays as the attempted consignation did not amount to payment

Alexandra V. Khadka Obligations and Contracts

Payment or Performance